Why Does Guidance Residential Sell Its Contracts to Freddie Mac?
This is one of the most common questions that we receive about Guidance Residential’s halal mortgage practices: Why does Guidance sell its contracts to Freddie Mac? Some customers are concerned that selling contracts to Freddie Mac could violate Islamic principles; however, this is not the case. Freddie Mac is simply brought on as another investor in the property, in a manner that is fully compliant with Shariah guidelines.
The short answer is that Guidance Residential’s Declining Balance Co-ownership Program has been designed to comply with Shariah principles from A to Z in all of its services. Guidance obtains external funding for the program through an agreement with Freddie Mac, a government-owned corporation that helps support the home financing market. In this agreement, Freddie Mac makes investments to take a co-ownership stake in properties financed under the program.
Shariah scholars have examined this arrangement and declared it to be halal. Read on for details.
Who is Freddie Mac?
Freddie Mac is not a lender or a bank. This means it is barred from being able to lend money to anyone.
It was chartered by Congress in 1970 as a private entity to provide additional money to mortgage lenders (wiki). The U.S. government realized that local banks and home loan providers do not have enough money available to meet the mortgage demand from home buyers. Freddie Mac’s services helped to better facilitate the dream of home ownership for Americans.
Freddie Mac was created as an investor. For the most part, it buys mortgage contracts issued by banks and then sells them off in the secondary markets to major investors like pension funds or insurance companies.
Does Guidance Residential sell debt to Freddie Mac?
Absolutely not. Buying and selling debt is not permissible according to the Islamic Shariah. Guidance’s Shariah board, along with 18 law firms, developed a unique contract with Freddie Mac based upon the co-ownership model. This ensures that when Guidance transacts with Freddie Mac, a sale of the debt does not occur.
Guidance simply brings on Freddie Mac as an additional investor on the back end (again, with a shariah-compliant contract). Guidance is the only institution that has set up such an agreement with Freddie Mac.
It is important to note that the contract signed by the homeowner remains unchanged throughout the process.
Why does Guidance sell contracts to Freddie Mac?
Under Guidance Residential’s co-ownership program, Guidance first uses its own funds to purchase a property alongside a home buyer, and in a separate step sells part or all of its ownership stake to Freddie Mac. This collaborative effort allows Guidance Residential to bring on Freddie Mac as an investor alongside the homeowner without involving loans or interest.
This provides additional capital that enables Guidance Residential to benefit more home buyers.
Does this change the contract?
No, Guidance Residential remains the entity to deliver services to the home buyer, and all terms agreed upon in the co-ownership agreement remain unchanged for the duration of the contract period.
Do other Islamic mortgage companies sell their contracts to Freddie Mac?
No other Islamic home finance providers or Islamic banks sell co-ownership contracts to Freddie Mac. Guidance Residential is the only organization in the U.S. permitted to deliver a declining co-ownership structure to Freddie Mac, and we are very proud of this accomplishment.
Has this arrangement been certified as halal?
Yes, it is halal. Guidance Residential worked with lawyers and to ensure that the structure of the contract does not change with the addition of this investor. All details of the contract remain shariah compliant. Continued compliance is guaranteed through regular audits by an independent shariah board.
How can I find out more?
Guidance Residential’s co-ownership model of Islamic home financing remains the #1 U.S. Islamic home financing provider, with more than 40,000 families assisted over more than 20 years. Learn more and get started on your home finance journey today.
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Your Guidance Residential Account Executive is here to help with any questions. Looking to refinance or purchase? Have a friend or family member who is looking for a home? Call 1.866.Guidance, or start an application today!
Originally published in September 2020, updated February 2024.